Dividend Kings In Focus: Vectren Corporation (VVC)

Competitive Advantage & Recession Performance

It’s not hard to think about a competitive advantage for a well-established utility. The business is often quite literally a monopoly, generating an essential for everyday living. Of course the downside is generally the lack of potential growth as a consequence of regulation. It’s a trade off, but you do have a good deal of consistency as a result.

Here’s a look at how the compared fared leading up to, during and after the most recent recession:

• 2007 earnings-per-share = $1.83
• 2008 earnings-per-share = $1.63
• 2009 earnings-per-share = $1.79
• 2010 earnings-per-share = $1.65
• 2011 earnings-per-share = $1.73
• 2012 earnings-per-share = $1.94

You can see that utilities are not recession-proof. Still, there are three basic notions that come into pay.

For one thing, while you did have a decrease in earnings, it was only a decrease of about 11% at its worst. Even in the worst of times, the vast majority of people still pay their electric bill.

The second thing to note is that the dividend was still increasing during this time. The payout ratio got all the way up to 80% in 2008, but the dividend was still holding strong.

Finally, we can see the “snap back” effect take place, as earnings eventually recovered. Indeed, the company is now earning well north of $2 per share annually.

Growth Prospects

Here’s a look at the dividend and earnings growth rates over the 2006 through 2015 period:

• Earnings-per-share have grown at an average compound rate of 5.8% per annum.
• Dividends per share have grown at an average compound rate of 2.5% per annum.

Incidentally, this also means that the payout ratio has been declining a bit over the years. Indeed, you don’t have to take my word for it. Here’s a look at the per share earnings, dividends and payout ratio for Vectren Corporation (NYSE:VVC) from 2010 until today:

Source: Vectren, AGA Financial Forum, Slide 10

You can see that while the dividend has been increasing, earnings-per-share have been growing at a faster rate. Five to six percent annually is not a blistering pace, but it is reasonably solid for a utility. Moreover, with a payout ratio held in check, future dividend growth becomes easier to formulate.

Analysts are presently anticipating intermediate-term business growth for the company to be in the 5% to 9% range. Given the above information (a historical rate in the 5% to 6% range) and the industry that we’re dealing with, you might anticipate something on the lower end of this range.